How to Choose the Right Business Structure for Your Small Business

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Before registering your business, you should consider the different options available to you. From a legal point of view, there are three common types of business structure: Sole Proprietorship, Partnership, and Corporation. Each structure has different and important implications for liability, taxation, and succession. What are the advantages for your business of incorporating a company versus registering a partnership or a sole proprietorship?

Below we provide an overview of each business structure, including each of their advantages and disadvantages.

Business Structure #1: Sole Proprietorship

Starting a sole proprietorship is the simplest way to set up a business. As a sole proprietor you will be classified as self employed and fully responsible for all debts and obligations related to your business. For example a should a creditor file a claim against your business, they will have a right against your assets, whether business or personal. This is known as unlimited liability.

In a sole proprietorship, you would perform all the functions required for the successful operation of the business. These include:

  • Securing the capital
  • Establishing and operating the business
  • Assuming all risks
  • Accepting all profits and losses

Advantages of a Sole Proprietorship

  • Low start-up costs
  • Greatest freedom from regulation
  • Owner in direct control of decision making
  • Minimal working capital required
  • Tax advantages to owner
  • All profits to owner

Disadvantages of a Sole Proprietorship

  • Unlimited liability
  • Lack of continuity in business organization in absence of owner
  • Difficulty in raising capital
  • No name protection

Business Structure #2: General Partnership

A partnership is an agreement in which you and one or more people combine resources in a business with a view to making a profit. In a General Partnership, you and one or more other owners would share the management of a business, and each partner would be personally liable for all debts and obligations incurred. This means that each partner is responsible for, and must assume, the consequences of the actions of the other partner(s).

In order to establish the terms of the Partnership and to protect yourself in the event of a disagreement or dissolution of a Partnership, a partnership agreement should be drawn up. You can access sample partnership agreements at Small Business BC.

Advantages of a General Partnership

  • Ease of formation
  • Low start-up costs
  • Additional sources of investment capital
  • Possible tax advantages
  • Limited regulation
  • Broader management base

Disadvantages of a General Partnership

  • Unlimited liability
  • Divided authority
  • Difficulty in raising additional capital
  • Hard to find suitable partners
  • Possible development of conflict between partners
  • Partners can legally bind each other without prior approval
  • Lack of continuity
  • No name protection

Business Structure #3: Incorporation

A corporation, also known as a limited company, is a legal entity that is separate and distinct from its members (shareholders). Companies are incorporated in BC according to the provisions of the Business Corporations Act.

When a company is incorporated, it acquires all of the powers of an individual, an independent existence – separate and distinct from its shareholders, and an unlimited life expectancy. An incorporated company can acquire assets, go into debt, enter into contracts, sue or be sued. Ownership interests in a corporation are usually easily changed, and shares may be transferred without affecting the corporation’s existence or continued operation.

You have the option to incorporate at a provincial level or at a federal level. If you intend to carry out activities solely in one province, provincial incorporations may be preferable. If you wish to expand your activities outside of the province at a later date, you must obtain an extra-provincial license from every other province in which it wishes to open an office or obtain a physical presence.

You should consider federal incorporation if you want to carry on business in more than one province or outside the country. Federal incorporation also offers heightened name protection under the Canada Business Corporation Act. Once federally incorporated, the corporate name has a protected status second only to trademark protection.

Advantages of Incorporation

  • Limited liability
  • Possible tax advantage (if you qualify for a small business tax rate)
  • Specialized management
  • Ownership is transferable
  • Continuous existence
  • Separate legal entity
  • Easier to raise capital
  • Name protection

Disadvantages of Incorporation

  • Closely regulated
  • Most expensive form of business to organize
  • Charter restrictions
  • Extensive record keeping necessary
  • Possible double taxation of profits
  • Shareholders (directors) may be held legally responsible in certain circumstances
  • Personal guarantees undermine limited liability advantages

Business Structure #4 – Co-ops

A co-operative differs from other business structures in that it’s owned by an association of people or businesses that pool their resources to meet a common goal. This structure is democratic in nature as each member gets one vote.

Co-operatives are considered a legal entity, meaning the business structure limits the liability of the individual members. It also allows the business to acquire assets, enter into contracts, take on debt and much more.

Co-operatives in Canada are mostly located in economic sectors such as agriculture, food, social services, retail and wholesale. Learn more about co-operatives by reading our Introduction to Co-ops article.

Take our E-Course

Looking for more information on how to choose the right business structure? Take Small Business BC’s “How to Choose the Right Business Structure” E-Course and understand the options before you decide. Our e-courses are available to you for one-year after you register, meaning you can learn at your own pace.

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No matter what stage of business, or what problem you face, Small Business BC offers a range of webinars, our on-demand E-Learning education, and one-on-one advisory sessions to suit any business.

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